Henderson European Focus Trust 02 February 2022

Henderson European Focus Trust (HEFT) offers investors a differentiated portfolio of European equities, with its managers John Bennett and Tom O’Hara aiming to produce a stylistically balanced portfolio. We note that Tom has taken an increased role in managing the trust’s relationship with its board and shareholders, as we describe under Management.

HEFT has long held an overall ‘core’ style, with the managers preferring to invest in companies which can benefit from positive changes in their circumstances. The team have long been cautious of the dominance of growth investing and are increasingly aware of the impact that rising bond yields may have on the style, intentionally avoiding expensive growth stocks as a result. HEFT’s main exposure remains to companies which have a clear capacity to capitalise on the post-pandemic consumer recovery. This positions HEFT towards consumer, energy and travel stocks, as we describe in the Portfolio section.

HEFT has outperformed its benchmark, the FTSE World Europe ex UK Index, over both a five-year and 12-month period. HEFT has also outperformed its peers over the last 12 months, being better positioned to weather the recent market turmoil. Over the long term HEFT has also been able to avoid many of the headwinds facing either European growth or value investors. This is one of the aims of the team’s investment philosophy, as we outline in the Performance section.

The trust has recently introduced €35m structural Gearing, which may potentially enhance the trust’s long term returns for equity holders. HEFT continues to trade at a wide Discount, 11.5% currently, wider than its peers and its own five year average of 7.2%. In our view, this reflects investors’ recent aversion to the European sector and preference for growth stocks, though this may be set to change given the current market environment.

We believe that HEFT offers an interesting option for European equity investors, as the team’s stylistically balanced approach may soon come into favour. Thanks to the combination of the COVID-19 recovery and supply chain shocks we are already seeing see a resurgence in inflation, which may bring an end to the dominance of growth investing given its upwards pressure on bond yields and negative impact on the ‘long duration’ trade. If investors believe that such a scenario is likely in the near term, then they may find themselves aligned with the views of the team behind HEFT, who continue to look for signs of a material rise in bond yields and the opportunity to reposition accordingly. Likewise, more cautious investors who do not want to be exposed to extreme valuations may also find HEFT an attractive choice given the managers’ intentional avoidance of both expensive growth and deep value stocks.

We also believe that the team’s approach to ESG integration may be a refreshing alternative for investors who feel that the market has been too heavy-handed in its application. The team’s willingness to invest in some of the less ESG compliant industries, albeit in the more ESG-compliant companies within these industries – may align with some investors’ views while also offering a differentiated potential source of alpha. We note the managers do believe though that the direction of travel in ESG is worth considering in investment decisions. We are also encouraged by the gradual shift in the responsibilities of the management team, indicating a willingness for a well-managed transition between the two managers, and the team approach.